For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.

Our mothers always taught us that “everyone else is doing it” isn’t a good reason to do something. But when it comes to IRA contributions, it looks like “everyone else” may actually be right.

Retirement is expensive. IRAs are one of the best ways we have for preparing for that reality. In fact, making the most of tax-advantaged accounts is one of the easiest things you can do to boost the tax-efficiency of your portfolio over the long term. So if you’re not taking advantage of the full benefit that these accounts offer, now’s the time to start.

An analysis of IRA contributions made by Vanguard clients since 2007 shows that half of investors that made a contribution, contributed the maximum amount. That’s great news, especially when you consider that we’re only looking at Vanguard contributions (some portion of the other half are likely contributing the max as well, but splitting their contribution among investment companies).

Even better news: It’s not just older investors who are investing the maximum amount allowed. Take a look at the accompanying graph, which shows, by age, what percentage of people who made an IRA contribution at Vanguard did the maximum for the 2012 tax year. By age 25, nearly half of investors maxed out their savings.

Figure 1: Percentage of contributing investors who contributed the max in 2012, by age

Source: Vanguard

But what’s going on at age 50? Why the drop in the percentage of people who contributed the maximum? The answer may be that some people aren’t aware that they can make an additional $1,000 “catch-up” contribution after they turn 50. Let’s see what this graph looks like if we consider the catch-up provision.

Figure 2: Percentage of contributing investors who contributed the max in 2012, by age

Source: Vanguard

It appears that some people are missing out! If you’ll be 50 or older in 2013, don’t forget to contribute your extra $1,000!

Also, don’t forget that the limits have increased for 2013. You can now contribute $5,500 if you’re under 50 in 2013, and $6,500 if you turned 50 or older. The last time the limits increased, in 2008, the percentage of contributing investors who put in the max fell by 10 percentage points.

You might think that this drop is better explained by the global financial crisis than by a lack of awareness, and that might be part of the reason. After all, the number of people who made any contribution also dropped by about 10 percentage points in 2008. But if we look at the percentage of people that contributed the 2007 max amount or greater in 2008, a drop is difficult to discern.

Figure 3: Percentage of contributing investors who contributed the max, by age

Source: Vanguard

One takeaway: In looking at Vanguard’s IRA investors, we find that more than half max out their contributions. So stop and ask yourself if you max. If you do, that’s great, and we encourage you to continue to do so. If you don’t, then ask yourself why not and get a plan in place so that you can get to the max. Down the road you’ll be grateful that you did.

The authors would like to thank John Rykaczewski in our Client Insight Group for helping to acquire the data used in this blog post.

Notes: All investing is subject to risk, including possible loss of principal. When taking withdrawals from an IRA before age 59/-1/2, you may have to pay ordinary income tax plus a 10% federal tax penalty.

Maria Bruno

Maria is a senior retirement strategist in Vanguard Investment Strategy Group. She leads a global team that's responsible for conducting research and providing thought leadership on the topics of retirement, wealth, portfolio construction, and financial planning for individual investors. Maria specializes in retirement planning, retirement income solutions, and wealth management strategies. Prior to her current role, Maria worked in our financial planning and advice departments. Maria earned a bachelor of science in business administration (B.S.B.A.) from Villanova University and is a Certified Financial Planner™ professional.

Stephen Weber

Stephen Weber, CFP®, is an investment analyst in Vanguard Investment Strategy Group. Previously, he managed the design and implementation of software and internet applications related to financial planning, portfolio analysis, and portfolio monitoring. Stephen has more than 20 years of experience in the financial services industry. He has earned the CFP® certification and an M.B.A. and M.S.I.S. from The Pennsylvania State University.

Comments

Tony V. | February 9, 2015 12:10 am

Yes I do max my company 401K/TSA and am aware of the age 50 catch up. I also have a supplemental IRA plan and have been investing additional funds in addition to my company’s 5%. I figure it is better for my additional money to make tax deferred earnings on any growth. I also have a traditional account, but need to read more about making those investments more tax advantage.

Last year my company’s IRA plans offered the ability to invest in Roth with the 401k/TSA. I am contributing to a Roth and have done an in plan conversion of some of my money. I am feeling like my investment buckets are a bit scattered, but in reading many of your articles you seem to be encouraging diversification of these buckets of money that will become sources of retirement income. I feel that I am on the right track, but there always seems to be something else we need to focus on like HSA accounts and the amount it will cost for healthcare in addition to basic retirement.

I enjoy your articles that address multiple retirement concepts, since that is very helpful. Right now I still feel that retirement is like a Monopoly game and I am squirreling away as much as I can with keeping short term debt free and having an emergency savings fund of 12 months. The second home is paid off, and the primary mortgage has a good interest rate and is on an accelerated payment plan. Always reading your blogs/articles to determine if I should be handling something differently.

Gene Bruno B. | December 5, 2014 6:30 am

Maria Bruno,
I do find your comments and articles to be helpful but…they tend to get too technical and bogged down with just too many percentages, etc. I have been an investor of one kind or another since I was 12 and have always lived by the mantra live below your means and save approximately 10% of your earnings.

Your 4% retirement article was just too complicated Maria; even for someone like me. My wife would have stopped reading by the first paragraph. I have thanked God I switched to Vanguard and the main reason was John Bogle’s s low fee’s and basically “keeping it simple” philosophy about long term investing. I feel if you (and others at Vanguard) could simplify by just sticking to a few major talking points it would reach a wider audience.

Thomas S. | January 22, 2014 8:32 pm

ALL WELL AND GOOD TO CONTRIBUTE THE MAX. BUT IM IN A SITUATION NOW WHERE MY WIFE AND I RETIREMENT WE ARE LIVING PAY CHECK TO PAY CHECK. SO I DONT HAVE THE FUNDS TO CONTRIBUTE THE MAX. I ALSO WORK 4 DAYS A WEEK SO WE HAVE A LITTLE MAD MONEY. I STARTED SAVING WHEN I WAS 50 AND DIDINT LEARN THE ROPES UNTIL I WAS 60 IM NOW 72 AND HOPE I DONT OUT LIVE MY MONEY. SO THATS MY STORY.

Donald G. | March 25, 2016 8:46 am

To Thomas S. 1-22-14 8:32 a.m.Sir you do not reveal in your blog whether you are a member of Vanguard.You appear to have gotten a late start at age 50.You and your wife are to be commended for staying with your savings goals. Are you both drawing S.S. benefits?I hope that you would consider calling Vanguard and letting them help you to increase your savings in the taxable arena as you can no longer contribute to a retirement account at your age of 74.Once you share with Vanguard your financial specifics they can help you set up an investment program to attain your goals. Good Luck to you and your wife in increasing your wealth!

Jim S. | January 3, 2014 6:07 pm

It would be nice to see an analysis of maxing out early in the year versus Dollar Cost Averaging thru the year. Based on my conservative analysis I’m getting at least $300 extra a year, if you compound that over years of working that adds up to be a bit more 😉

Jim, this is a good point. The difference is even more pronounced when you compare “early birds” with those who wait until the last minute to make their contributions. We’ll have a piece coming up in the next month or two talking about this “procrastination tax,” and we estimate that it can cost investors thousands of dollars in lost earnings over the long term. -Stephen

Fred J. | January 2, 2014 7:34 pm

Although the benefits of contributing to an IRA are obvious, there is one situation where IMO you should not contribute to a traditional IRA. If you are currently in the highest tax bracket and have maxed out your retirement account at work( 401k, SIMPLE, 403b, etc) then I would NOT contribute to a traditional IRA. Here’s why: all taxable IRA withdrawals are taxed at ordinary rates and not Long Term cap gain rates. If, instead, you save in a taxable account your stocks, equity funds, will get LT cap gain treatment after holding for 1 year.

Fred, thanks for your comment. You make a good point, explaining why there’s not a strong financial case for investing in a Traditional IRA when the contributions aren’t tax-deductible. You also make a good case for tax diversification by holding different account types (taxable, tax-deferred, Roth). One other option to consider, a “backdoor” Roth whereby you make a contribution to a Traditional IRA and then later convert to a Roth. I’m attaching a clip from a recent webcast where my colleague Joel Dickson and I explain the topic in a bit more detail. https://personal.vanguard.com/us/insights/video/2505-Exc2 -Maria

Jim S. | January 2, 2014 4:46 pm

One thing that bothers me is there is even a catch-up at all. Why have this? Why not set the limit at $6,500 for everyone and erase complexity. Those who max out at ages less than 50 would benefit from higher limits and have “heathier” balances to show for it. Granted they are the ones who probably don’t really need it but the simplier this is made the more likely others will get involved in using such a useful tool.

Jeff B. | January 25, 2015 9:27 pm

Nothing the gov’t does makes sense. Since most people don’t max out the $5,500 it would be more difficult to convince congress to make everyone’s max $6,500. Why have an income cap? If you make a combined income of over $300,000, why get phased out of a Roth?

Mike S. | January 2, 2014 4:33 pm

Richard G. | March 2, 2016 2:29 pm

To Mike S. 1-2–14 4:33 p.m.You had a question about the Windfall Elimination Provision and how many years needed to be paid in to come out from under these cuts.As a former Federal employee I can tell you the magic number is 30 years.You should always contact S.S. about the particulars.I transferred over to the FERS and started contributing to S.S.Every year that you contribute to S.S. lessens the cuts.You did not give any particulars about your employment history and I would suggest that you contact your employment office who should be able to spell out your exact % of cuts that you will be subject to.If you are in Civil Service then you will never reduce the cuts. If you are a member of FERS then you should not have any cuts for W.E.P. I would suggest you contact S.S. and get the formula for Government Pension Offset as well.I had 12 years under Civil Service and did not contribute S.S. However I was also in the USAF reserves part time and I did contribute to S.S. and kept current on my paid up quarters.Sometimes you can work your way out of these cuts by holding down a part time job and pay S.S. on those earnings. Good Luck to you Sir!

Richard L. | January 2, 2014 2:18 pm

Hi Richard, we have information on vanguard.com that compares the key features of Roth and traditional IRAs, including eligibility. From this page, you can access the IRS information for deductibility of traditional IRA contributions, which depend on whether you or your spouse are covered by a retirement plan at work. Hope this helps! -Maria

Holly H. | January 2, 2014 12:56 pm

To Paul D.:
You can always save. You don’t need the government’s OK to do that.
You just can’t get an upfront tax credit for the money you put aside.
Do you really need a tax incentive to be responsible for your own future?

Paul D. | January 26, 2014 8:46 am

Holly,
You are absolutely correct and we still invest as much as we did before. The rub comes when you retire. My wife is still young enough to continue investing in her IRA, but since she was ‘downsized’ into early retirement, she can no longer invest in her IRA unless she returns to work…not something she is eager to do at 65.

Since our non IRA investments produce more than enough for us to live on, our current investing is essentially for our grandchildren who stand to benefit from inherited IRAs. The larger the balance in the IRA when it’s inherited, means more tax sheltered wealth that can be passed on.

It just seems wrong to me for the government to tell us that since we don’t have a job, we can no longer build tax sheltered wealth for our own families, but we must continue to pay taxes to support families who don’t even want to work. That’s probably never going to change though.

Hozona B. | November 29, 2013 4:50 pm

I am 49 y/o just retired from fire division N.J. P.E.R.S pension. Wife & I maxing out 457 & 403 b s for years also roths with vanguard, We have sufficient money for college because both kids attended local community college then transfer in state.
I was thinking about rolling over my 457s to Vanguards IRA but, found out that once in a IRA, i will be penalized to withdrawn money because not 59.5 y/o
Otherwise, leave it alone with high operating cost from METLIFE & NATIONWIDE Universal Annuity 457 averaging 2.5%! We don’t need the money now only for retirement. However, if something happens, i can take the money now for whatever reason no penalty. I hope this blog can help me with some guidance. Thanks, Hondo

Richard G. | December 23, 2015 5:36 pm

To Hozona B. Nov. 15, 2013 11:20 p.m. You stated a reluctance to transfer you and your wife’s 403b and 457b retirement over to a Vanguard IRA because you are not 591/2. In a blog you do not provide enough information for a CFP to give you an intelligent answer.IF you can live off of your taxable savings and investments then you shouldn’t be needing to tap your IRA early right? I would find it very burdensome to have to pay 2.5% fees/yr when you could transfer it all to Vanguard and pay about 1/5 of that.You said that you already had a roth at Vanguard why not consider transferring you wife’s retirement accounts,pay the taxes and put hers into the Roth?Then you could keep funding your 403b and not come under the 591/2 rule and could access those funds.This would be a compromise but maybe some access to your retirement money is better than none.Good Luck to you Sir!.

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For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.